Don't be fooled by the recent run in

Ameristar Casinos

(ASCA)

.

The stock has shot up 15% over the past two weeks after the company raised its third-quarter guidance and casino giant

Harrah's

( HET) announced that it had received a buyout bid from two private equity firms.

While Ameristar is by no means a poorly run casino operator, the company faces a lack of growth prospects because of a very competitive Missouri operating environment and a lack of a casino development pipeline.

And despite the excitement that the Harrah's bid created about potential casino buyouts, a sale of Ameristar is unlikely at this time.

Craig Neilsen, Ameristar's chairman and CEO, owns 58% of the company's stock. A car crash in the 1980s left him paralyzed. One large investor in the stock says that the company is Neilsen's life, so he is very averse to cashing out.

At $25, Ameristar isn't necessarily expensive. But it's no bargain either, given its slower growth prospects.

The stock is now valued at over 18 times the consensus Wall Street estimate for next year's earnings, which are expected to grow 6.3%. This year, profit growth is expected to be 8.5%.

Ameristar's $2.15 billion enterprise value trades at 7.7 times next year's estimated earnings before interest, taxes, depreciation and amortization. That's right in line with the small-cap gaming average, says Steven Gart, an investment analyst with Nickel Capital, a hedge fund that invests in gaming stocks.

But Gart doesn't find Ameristar's shares attractive at these levels because of new competition coming on line next year that could hurt the company.

Competition Concerns

More than half of the Ameristar's profits come from two Missouri two casinos -- one in Kansas City and another in St. Charles, about 30 minutes from St. Louis. The company also operates a riverboat casino in Mississippi, several smaller properties in northeast Nevada, one casino outside Denver and a riverboat casino in Council Bluffs, Iowa.

Results in the Missouri market have been weak. In the second quarter, operating profits from these properties were flat because of aggressive promotional spending from competitors, which Ameristar has said it won't match.

"Instead of just pursuing market share at any cost, they're finding a balance between market share and profitability," says Ryan Worst, an analyst with Brean Murray.

When the company increased its third-quarter estimates last week without giving any reason for the boost, analysts hoped that it was because of less promotional spending in Missouri.

But even if this is the case, there are several headwinds against the company in Missouri.

Pinnacle

(PNK) - Get Report

is opening two new casinos in St. Louis in 2007 and 2008. Ameristar itself is constructing a $240 million hotel and conference center at its Saint Charles property.

But all this new supply comes at a time when the Missouri economy looks rather weak. According to the recent FDIC state profile of Missouri, the state's job growth was 1% in the second quarter, lagging the national rate of 1.4%. The manufacturing sector shed 10,400 jobs in the first half of the year, many in St. Louis.

Boeing

(BA) - Get Report

recently announced an additional 1,850 job cuts in the metro area.

"The

Missouri gambling industry in general really hasn't been a significant draw of tourism or visitors from outside the state," says Maggie Kirilova, an assistant economist with Economy.com. The slowing economy in the state won't pummel gambling revenue but will result in a pullback, she says.

This slowdown, though, has yet to manifest itself. In August, Missouri's 11 riverboat casinos posted a 7.7% year-over-year increase in gaming revenue. Ameristar's St. Charles property saw revenue increase 4%, while the Kansas City property rose 5.6%.

Ameristar's properties outside of Missouri are also facing issues.

In Vicksburg, Miss., the company's riverboat casino performed well after Hurricane Katrina, as travelers flocked to the area because the casinos remained open right after the hurricane. But as the hurricane-damaged Gulf Coast casinos continue to reopen this year, Ameristar acknowledges that its growth at this property will be affected, particularly in the fourth quarter of this year. The Vicksburg casino generates about 14% of Ameristar's profits.

In Council Bluffs, Iowa, the company saw its biggest challenge in the second quarter. EBITDA at the property fell 21%, as two Harrah's casinos in the market increased competition. Ameristar is exploring expansion scenarios at the site to boost profitability.

The company couldn't be reached for comment on its growth propects.

Expansion Questions

Adding to growth concerns is the fact that Ameristar isn't building any new casinos.

The company recently renovated and rebranded its Black Hawk casino, 30 minutes from Denver. The new hotel being built at the property will help boost profits, but it won't open until 2008.

Ameristar's Nevada casinos, located in the northeastern corner of the state, represent a small piece of the company's revenue.

Rather than pursue new development, Ameristar likely will grow through acquisitions, says Eric Green, portfolio manager with Penn Capital Management, which owns the stock.

"If Harrah's divests some properties, the logical person to buy any of their properties is Ameristar," he says. In particular, Harrah's Rio in Las Vegas would be a nice match for Ameristar, he says. As of the end of the second quarter, Ameristar had $117.8 million of cash on its books.

To avoid regulatory issues holding up a sale of the company, Harrah's likely will sell properties in Indiana, Illinois, Louisiana, Mississippi, Missouri and Iowa, according to CreditSights analyst Adam Cohen.

Earlier this year, Ameristar lost out on the buyout battle for

Aztar

( AZR). "They were aggressively bidding for Aztar and would've paid a decent price, so they're going to buy something," Green says.

Absent a major acquisition, it's hard to get excited about the stock.